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Why Whole Foods Market, Inc. Shares Tumbled

Whole Foods stock looks as expensive as its organic fare. Here's why the market was underwhelmed by earnings.

Isaac has been been a Foolish investor for 10 years. He manages client portfolios at Huckleberry Capital Management, which involves (mostly) buying and (some) selling of stocks in their accounts. When he is not hunting for companies with wide economic moats, he is chasing his toddler around the Blue Ridge Mountains.

Whole Foods Market (NASDAQ:WFM) reported savory first-quarter earnings on Wednesday, but the market lost its appetite for the green grocer's shares nonetheless. During after hours trading, Whole Foods' stock sagged like a wilted head of lettuce, losing more than 7%. Overall, it was a typically solid performance by Whole Foods against the typically high expectations of Wall Street.

Metric

Wall Street Estimate

Q1 2014 Actual

Earnings Per Share

$0.44

$0.42

Change From Year-Ago EPS

7%

Revenue

$4.29 billion

$4.24 billion

Change From Year-Ago Revenue

10%

Here are five takeaways from Whole Foods' latest results.

1. Earnings took a misstep. Wall Street analysts predicted earnings of $0.44 per share, but Whole Foods fell two pennies shy, representing a 7% increase from the same quarter last year. These results weren't enough to satisfy shareholders of a stock trading at a lofty multiple of 38 times earnings. Management noted that fickle winter weather hurt foot traffic, and the company is starting to face the law of large numbers. In the words of co-CEO John Mackey, "[I]t's just a bigger cruise ship to try to steer."

2. Same-store sales slacked. The natural-foods grocer reported a same-store sales increase of 5.4% during the quarter, enough to make rivals salivate. Consider, for example, that the grocery industry average same-store sales declined 1.9% in January. Whole Foods, however, marches to a different beat, and fell way short of its heady 7.2% increase in the prior year. It's a tough comparison, to be sure, but management also revised the outlook for 2014 downward from a same-store range of 5.5% to 7% to a new range of 5.5% to 6.2%. The retail industry fixates on same-store sales that reflect stores open more than a year, and Whole Foods came up short in this category.

4. More stores, more opportunity. Whole Foods drives roughly 6% of sales from new stores each year. Despite reporting only 5.7% in the latest quarter, management believes 2014 will finish in that ballpark. Further, Whole Foods appears increasingly optimistic about boosting the store count, even in tight geographic spaces. Take urban centers, for example, where co-CEO Walter Robb noted, "So what we see is that in markets like New York City and in Washington D.C. ... these major metro markets, we can put so many more stores than we ever dreamed we'd be able to put in 10 years ago. And frankly if the market continues to evolve in a positive direction, I believe that we'll continue to be able to put the stores closer and closer together." Whole Foods aims to open 33 to 38 stores in 2014, increasing square footage by 8% to 10%.

5. Running a tight ship. As Whole Foods grows into a larger vessel, investors can rest assured in management's ability to navigate. The company shined when it came to one key metric Foolish investors love to follow: return on invested capital, or ROIC. The company's ROIC, which assesses management's ability to get the most bang for the buck, ticked up by 26 basis points from 13.0% to 13.3%.

All told, Whole Foods' quarter revealed a company that remains sure and steady, if slightly less nimble. For comparison, two of its competitors, The Fresh Market and Sprouts Farmers Market each operate less than half of Whole Foods current 373 stores nationwide, with plenty of runway ahead.

Still, as Mackey pointed out, "It's true there's a little bit more competition out there now, but the market opportunity is so much greater than it used to be. There's room for lots of players." A rising tide will lift all ships, Whole Foods included.